South Korea unveils 3-phase roadmap to expand tokenized securities beyond fractional investment

South Korea's tokenized securities market will expand beyond fractional investment to cover private money market funds, bonds and unlisted shares starting Feb. 4 next year, when amendments to the Electronic Securities Act and Capital Markets Act take effect. Financial authorities unveiled a three-phase roadmap that begins with tokenizing institutional private-market products and unlisted shares, broadens to publicly offered securities, and ultimately moves all securities issuance, trading and settlement onto a blockchain using stablecoins.

The Financial Services Commission announced the policy direction Friday at the third meeting of its public-private joint STO consultative body. The core of the initiative is extending the STO infrastructure — previously limited to fractional investment products — to conventional securities such as shares, bonds and funds. The move follows a global trend of tokenizing existing securities, including BlackRock's private MMF "BUIDL" in the United States and Hong Kong's tokenized green government bonds.

Tokenized securities record the issuance and distribution of shares, bonds and other instruments on a distributed ledger such as a blockchain. The challenge is that the existing electronic securities system cannot simply be transplanted. While that system already has infrastructure for issuance, distribution and rights management, tokenized securities require entirely new infrastructure suited to distributed ledgers. Tokenizing complex securities such as shares — which carry voting rights, dividends, preemptive rights, capital increases and reductions — from the outset would impose a heavy system-building burden.

The first phase therefore tests tokenization in the live market with products that are relatively straightforward to implement. When the law takes effect next February, institutional-only private MMFs and private bonds will be tokenized, and unlisted shares will be issued as tokenized securities through a trust structure. Publicly offered fractional investment securities, which involve comparatively simple rights and smaller scale, will also be tokenized at that stage.

Unlisted shares will not be tokenized directly. Instead, unlisted shares already issued as electronic securities will be deposited with a custodian or trust operator, and the beneficial interest arising from those shares will be structured as "unlisted share trust beneficiary certificates" and issued as tokenized securities. Voting rights, dividends and other rights attached to the underlying shares will continue to be managed within the existing electronic securities system, while the tokenized securities infrastructure handles the rights of the trust beneficiary certificates.

Phase two will extend the scope to publicly offered securities open to retail investors. After phase one verifies the stability, efficiency and market demand of tokenized products, the program will expand to publicly offered bonds and MMFs. Listed shares will also be subject to a tokenization model to be validated and piloted through Korea Exchange. Authorities said they plan to draw on the tokenization pilot programs of the New York Stock Exchange and NASDAQ.

Phase three will shift settlement of securities transactions to a blockchain-based system. Currently, issuance and distribution data for tokenized securities are recorded on a distributed ledger, but payment settlement still runs through the existing Korea Securities Depository system. The final phase envisions building an on-chain settlement infrastructure that uses stablecoins or similar instruments as payment vehicles, processing both securities transfers and cash settlement entirely on the blockchain.

Distribution will operate within the existing capital markets licensing framework. Firms already licensed for investment brokerage or dealing under the Capital Markets Act may intermediate or trade tokenized securities within the scope of their existing licenses. Over-the-counter exchanges currently undergoing full licensing review must consult in advance with the Financial Supervisory Service if they wish to support tokenized securities trading. A new licensing category will be created for OTC exchanges handling debt securities, and retail investors will be permitted to make net purchases of up to 100 million won ($73,600) per year at each exchange.

At the issuance stage, non-financial firms will also be able to register directly as account management institutions if they meet certain requirements — specifically, holding at least 4 billion won in equity capital and securing specialist personnel in account management, internal controls and information technology.

In the fractional investment segment, a new pathway will allow multiple assets of the same type to be bundled into a single product. Previously, fractional investment products were required to be built around a single underlying asset, but conditional pooling of assets of the same type carrying identical rights will now be permitted. Issuers must meet investor protection requirements, including disclosing the price, risk and return profile of each individual asset separately and excluding non-performing assets from any pool.

Future receivables will also be eligible as underlying assets for fractional investment products, provided certain conditions are met — namely, that a supply or sales contract has already been concluded, the right can be specifically identified, and the right is likely to materialize in the near term. Enhanced investor protections such as credit enhancement must also be in place. For publicly offered fractional investment products, the per-person subscription limit was set at the lower of 30 million won or 5 percent of the issuance amount, presented as a standard guideline.

Fractional investment based on standard essential patents will not be permitted at this stage and will undergo further review. Authorities said they will examine whether patent rights can in practice be readily disposed of, and whether the collection and distribution of royalties from a patent pool constitutes a trust under the Capital Markets Act.

Investment contract securities also require further refinement. For the shared-equity type, authorities plan to research ways to link securities account transfers with actual ownership changes to improve liquidity. For the project type, they will conduct additional review of standards to protect investors in situations such as issuer bankruptcy.